Pages

Saturday, 16 February 2013

R&D: Act Three in the Climate-Policy Tragi-Comedy

If the implications were not so horribly tragic, the spectacle of humanity’s bumbling climate policy failures would make for an entertaining farce. And the next act promises more of the same.

In Act One, governments and environmentalists convinced themselves that economists were wrong to argue that greenhouse-gas-emissions pricing is essential to reduce emissions (whether via carbon tax or cap-and-trade). Governments feared the political cost of raising the price of energy derived from fossil fuels, while environmentalists assured them that people would voluntarily change their ways if informed of the financial benefits of energy efficiency and the quality-of-life benefits of changing behaviour. So, for much of two decades, climate policy was limited to information programs and subsidies, which failed utterly.

In Act Two, a number of governments and environmentalists reluctantly acknowledged that emissions pricing is essential, but politicians mostly balked when faced with being seen to cause energy-price increases. So they gave away permits that matched emission levels (European Union’s cap-and-trade), or they allowed cheap offsets that do little to reduce emissions (again, EU’s cap-and-trade), or they renamed existing fuel taxes as carbon taxes without increasing energy prices (many European countries), or they talked seriously about emissions pricing, but did nothing at all (US, Canada, Australia, Japan).

Act Three is still being scripted. It might involve ever-tighter emissions regulations on vehicles, electricity generators and industries. Criticized by economists for economic inefficiency, regulations have the advantage of making it difficult to see that politicians are causing energy price increases. For example, few people would have noticed if a low-carbon fuel standard had raised prices by 15 per cent over the last five years, a period during which gasoline prices fluctuated by several times that percentage. And regulations can actually reduce emissions!

But regulations are unlikely to be implemented if governments and environmentalists accept the latest arguments of armchair policy experts like Ted

Nordhaus, Michael Shellenberger and Bjørn Lomborg. They argue that governments should downplay emission pricing and replace it with research and development (R&D) subsidies that drive down the cost of low-emission technologies. Fund R&D until solar power is cheaper than coal power, or so the thinking goes. This is enticing to politicians because, again, they avoid emissions pricing. Polluting industries love it: “We promise to stop polluting as soon as you put us out of business with your solar innovations.” And, of course, climate skeptics support the idea because it is a logically flawed approach that, for the reasons described below, will prevent emissions reductions.

First, emissions pricing and R&D to reduce emissions are not alternatives, they are causally linked. Private R&D to reduce emissions happens when there are profitable opportunities. These opportunities only arise because of emissions pricing or regulations that ban emitting technologies.

Second, public R&D could happen without the profit opportunity, but public R&D will never be more than a tiny percentage of the R&D that is needed. Indeed, with government budgets all in deficit, public R&D funds require tax increases. Economists say the most economically efficient way to raise this money is – you guessed it – emissions pricing.

Third, there is no guarantee that R&D will enable renewable energy to outcompete fossil fuels over the next half century. Coal, gas and oil industries have an enormous capacity to fund their own R&D, and they have proven time and again their ability to cut costs in the face of competition. We need emissions pricing and regulations. Without these, we need to block, by regulation or civil disobedience if necessary, any projects that abet greenhouse gas emissions, like coal plants, oil pipelines and gasoline vehicle manufacturing plants. Most likely, Act Three will follow the lead of Acts One and Two of this planetary tragi-comedy.